Nepal is set to construct a number of large dams to cater for its ever increasing power demand. One of the big dams in the pipeline is Arun III dam in the Sankhuwasabha district in eastern Nepal. The Arun III dam was designed in the mid 1980s and little is known about its capability to resist major earthquakes which are probable in this region. The Himalayan region is one of the most earthquake prone zones in the world but the seismic hazard level of the region is not well established. This study was undertaken with a purpose to investigate the seismic performance of the Arun III dam under site specific design ground motions. In the first part of the research, a seismic hazard estimate was carried out for the eastern Nepal Himalayas where the Arun III dam is proposed. For the hazard study, two approaches were used: Probabilistic approach using Atkinson and Boore model of attenuation and Component Attenuation Model (CAM) methodology The established seismic hazard was used to select design ground motions for the site. Four real earthquake accelerograms and one synthetic record were selected. While selecting the ground motions, special attention was paid to the scaling of the records to match the characteristics of the design level event. The seismic performance of the dam was evaluated following the US Army Corps of Engineers guidelines, using both static and dynamic analysis approaches. Initially, the finite element model of the dam was developed and the seismic analysis was performed in a step by step manner starting from the preliminary level i.e. static analysis. The study the model was analysed using linear elastic dynamic analysis procedures - Response Spectrum Modal Analysis procedure and Time History Analysis procedure. The records selected from the seismic hazard study were applied as seismic loads to the finite element model of the dam structure in the dynamic analysis methodology. Then the results were analysed with the acceptance criteria established from the previous researches on gravity dams. In addition, a non-linear analysis was undertaken to evaluate the degree of cracking and damage to the dam structure under extreme earthquake excitation. Based on the analyses it was concluded that the Arun III dam is safe against collapse from the design level events but damage is probable primarily due to cracking relating to the localized high tensile stresses in the concrete.